The average return is not less than 4%. That's the dividend return. Total return is dividend return + capital appreciation. The less than 4% is considered as a "fixed salary" that you get regardless of what the market does. It generates cash that can be reinvested or spent. Buying quality companies when attractively priced takes care of the capital appreciation. When you combine both, you do better than index funds, because with index you don't control the portfolio (you buy good and bad companies), you don't control valuation (you pay market price for everything) and you pay MER.AdsJoint wrote: ↑Jan 21st, 2018 10:50 amI have two very simple, noob questions and will appreciate if anyone can advise me.
1. If the average return from dividend stocks/etfs portfolio is less than 4% then why even bother with it when market index funds can return 7%?
2. If YOU were to start creating your dividend portfolio today in a RRSP account with only $10000, what stocks or ETF (s) would you buy and how many?
Also, don't let the low yield to fool you. With an approach based on dividend investing, it's not just a less than 4% yield. It is a dividend stream that starts at , say 3% and grows, say, at 7% per year. Buy $100,000 of it and the year one dividend is $3,000. Compound the 7% growth for 30 years and the year 30 dividend is about $24,000. if the stock still yields 3% you've got a big capital gain. If it now yields 6% at year 30 because interest rates went up, the stock part is you've still got a quadruple in capital gain. The key is to monitor the safety of the dividend and the growth rate and trade into something else with better prospects if it no longer meets your goals for dividend and growth. Remember, in the end, for dividend growing companies, earnings drive stock price.
For example, take a traditional dividend grower, Canadian National Railway (CNR.TO). Its dividend is typically 1.6%, at any point that you buy. But look how earnings growth (orange line) drive stock price growth (black line). And look how dividends (white line) drives the portfolio yield overtime. CNR's annual return for the last 20 years is an impressive 15.9% per year, while indexing is much lower. BTW, that doesn't mean that indexing investing is not a good strategy, it's different, tailored for other purposes, with its own pros and cons, like DGI has its own pros and cons.
2. I personally wouldn't buy any ETF. I would choose between 5 and 10 stocks. You could pick stocks from different sectors for better diversification. On my RRSP, I only hold US stocks, since RRSP is the only vehicle where withhold tax doesn't apply. My goal is to live off growing income and never need to sell shares to produce that income, hence I let it compound so that a smaller portfolio can produce enough income to retire - but not every goal is the same. Some people prefer growth stocks to maximize total return and then when they're ready to retire they can build an income portfolio. Again, each strategy has pros and cons. What is are your goals, what kind of portfolio do you want on your RRSP? Do you want to hold Canadian or US companies? I'd first build a list of quality companies that meet your criteria to partner with the business. That doesn't mean they're all good buys, as some might be overvalued. Once you have a list of quality companies, then you can focus on valuation, one company at a time.
I'm in the process of reviewing my watchlist, and I'll shrink from what I have today. Part of the rationale to why I have such diverse list was to have different risk / reward exposure to have income growth and maximize total return. However, since I have my own trading models focused on growth and income, I'll narrow down the list with more strict quality aspects, and will change my rules to cease partnership to be more strict as well, and not wait so long. In the end, you need to build a list and have clear entry and exit rules for whatever strategy you pick. Also, you need to decide if you want to invest the $10,000 at once or if you'll dollar cost average and add slowly.